Assume the spot exchange rate for the Hungarian forint is 267.767 HUF. Also assume the inflation rate in the United States is 1.6 percent per year while it is 3.5 percent in Hungary. What is the expected exchange rate three years from now?

Question

Quizplus · Accepted Answer

The expected exchange rate can be calculated using the International Fisher Effect, which suggests that the currency of the country with a higher inflation rate will depreciate. The formula to calculate the expected exchange rate EER is: EER = S * (1 + i_foreign) / (1 + i_domestic), where S is the current spot exchange rate, i_foreign is the inflation rate of the foreign country (Hungary), and i_domestic is the inflation rate of the domestic country (USA). Applying this formula for 3 years: EER = 267.767 * (1 + 0.035)^3 / (1 + 0.016)^3 = 267.767 * 1.108 / 1.049 = 283.322 HUF.

Assume the Spot Exchange Rate for the Hungarian Forint Is